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Managerial Accounting
Members of Group:

Alit Wahyuningsih
Nyimas Shafira Ramadhanty
Dewa Ayu Sri Adnya Dewi

 Break-even Point in Units

 Break-even Point in Sales Dollars
 Multiproduct Analysis
 Graphic Representation of CVP
 Changes in CVP Variables
 CVP Analysis and Cost Calculations Based
on Activity
A break-even point is the point where total revenue is equal
to total cost, the point at which profit is equal to zero. To
pinpoint the break-even point in the unit, we focus on
operating profit.

 The initial company's decision in implementing unit

approaches sold on CVP analysis is to determine what is
meant by a unit
 The second decision centered on the separation of costs
into fixed and variable components
Use of Operating Profit in CVP Analysis
The income statement is a useful tool for organizing company
costs in fixed and variable categories.

Operating profit = Sales revenue - Variable costs - Fixed costs

Sales revenue is expressed as the selling price per unit times

the number of units sold, and the total variable cost is the
variable cost per unit times the number of units sold.

Operating profit = (Price x Number of units sold) - (Variable cost per

unit x Number of units sold) - Fixed costs
Whittier Company produces lawn mowers.
For the coming year, the controller has developed a projection of profit
and loss:
Sales (1000 units @ $ 400)$ 400,000
Less: Variable cost 325,000
Contributed margin $ 75,000
Less: Fixed cost 45,000
Operating profit $ 30,000
The price per unit of lawnmower is $ 400 and variable cost per unit is $
325 ($ 325,000 / 1,000 units). Fixed cost is S45.000.
So the operating profit equation on the break-even point:
0 = ($400 x Unit) – ($325 x Unit) - $45.000
0 = ($75 x Unit) - $45.000
$75 x Unit = $45.000
Unit = 600
Thus, Whittier had to sell 600 lawn mowers to cover all
fixed and variable costs.
Checking answers:
Sales (600 units @ $ 400) $ 240,000
Less: Variable cost 195,000
Contributed margin $ 45,000
Less: Fixed cost 45,000
Operating profit $ 0
Shortcuts to Calculate Break-even Units
Contribution margin is sales revenue minus total variable cost.
Number of units = Permanent costs / Contribution margin per unit

The first way is to divide the total contribution margin with units sold to
make $ 75 per unit ($ 75,000-1,000). The second way is to calculate the
price minus the variable cost per unit, the result is the same, $ 75 per unit
($ 400- $ 325).
Unit amount = $ 445,000 / ($ 400- $ 325)
= $ 45,000 / $ 75
= 600
Sales in the Units Required to Achieve Profit Targets
Target Profit in Dollar Amount
Whittier Company wanted to earn an operating profit of $ 60,000. How many
lawn mowers to sell to achieve these results?
$ 60,000 = ($ 400 x Unit) - ($ 325 x Unit) - $ 45,000
$ 105,000 = $ 75 x Unit
Unit = 1,400

The basic equality of break-even:

Unit = ($ 45,000 + $ 60,000) / ($ 400 - $ 325)
Unit = $ 105,000 / $ 75
Unit = 1,400
Whittier had to sell 1,400 lawnmowers to generate an
operating profit of $ 60,000.
Sales (1,400 units @ $ 400) $ 560,000
Less: Variable cost 455,000
Contributing margin $ 105,000
Less: Fixed cost 45,000
Operating profit $ 60,000
Target Profit in a Percentage of Sales Revenue
Whittier Company wants to know the number of lawnmowers to
be sold to generate a profit equal to 15 percent of sales revenue.
Sales revenue is the price multiplied by the quantity sold.

0.15 ($ 400) (Unit) = ($ 400 x Unit) - ($ 325 x Unit) - $ 45,000

$ 60 x Unit = ($ 400 x Unit) - ($ 325 x Unit) - $ 45,000
$ 60 x Unit = ($ 75 x Unit) - $ 45,000
$ 15 x Unit = $ 45,000
Unit = 3,000
Target Profit after Tax
In general, taxes are calculated as a percentage of earnings. Profit after tax
is calculated by subtracting tax from operating profit (or profit before tax).
Net income = Operating profit - Income tax
= Operating profit - (Tax rate x Operating profit)
= Operating profit (1 - Tax rate)

Operating profit = Net income / (1 - Tax rate)

Whittier Company wants to earn a net profit of $ 48,750 and its tax rate is
35 percent.
$ 48,750 = Operating profit - (0.35 x Operating profit)
$ 48,750 = 0.65 (Operating profit)
$ 75,000 = Operating profit
Number of units to sell:
Unit = ($ 45,000 + $ 75,000)
Unit = $ 120,000 / $ 75
Unit = 1.600
Check answers by compiling income statements based on the sale of 1,600
Sales (1,600 $ 400) $ 640,000
Less: Variable cost 520,000
Contribution margin $ 120,000
Less: Fixed cost 45,000
Operating profit $ 75,000
Less: Income tax (35% tax rate) 26,250
Net income $ 48,750
In some cases, manager prefers to use sales revenue as
size of sales activity that unit sold.
Whittier Company's income statement based on variable
cost calculations for 1,000 lawnmowers.
The variable cost ratio is 0.8125 ($ 325,000 / $ 400,000); contribution margin
ratio is 0.1875 (calculated from 1-0,8125 or $ 75,000 / $ 400,000). Fixed costs
are $ 45,000.
What is sales revenue that Whittier should earn to break even?
Operating profit = Sales - Variable costs - Fixed costs
0 = Sales - (Variable cost ratio x Sales) - Fixed costs
0 = Sales (1 - Variable cost ratio) - Fixed cost
0 = Sales (1 - 0.8125) - $ 45,000
Sales (0.1875) = $ 45,000
Sales = $ 240,000

So Whittier must earn $ 240,000 in revenues to reach break-even point. (1-

0,8125) is the contribution margin ratio.
Target Profit and Sales Revenue
Consider the following questions. What income should Whittier
earn to make a $ 60,000 tax profit?
To answer that question, add a $ 60,000 profit target at a $
45,000 fixed fee and divide it by the contribution margin ratio.
Sales = ($ 45,000 + $ 60,000) / 0.1875
= $ 105,000 / 0.1875
= $ 560,000
The profit volume cost analysis is quite easy to
implement in a single product setting. However, most
companies produce and sell a product or service.
Although the conceptual complexity of CVP analysis is
higher in multiproduct situations, the operation is not
much different.
A case in the Whittier Company has decided to offer two models of lawn mowers: a
manual lawn mower with a $ 400 sale price and an automatic lawn mower for $
800. The Marketing Department believes that 1,200 manual lawn mowers and 800
automatic lawn mowers can be sold over the next year. The company's supervisor
has made the following projected income statement based on the sales forecast.
Break-even Point in the Unit

• The manual lawn mower has a How much each model

contribution margin per unit of $ that must be sold in
75 ($ 400- $ 325) order to reach the
break-even point?
• The automatic lawn mower has a
margin of $ 200 ($ 800- $ 600).
And then the solution is to apply the analysis separately to
each product line. That way, an individual break-even point
will be obtained if profit is defined as a margin product.
Manual breakeven unit = Fixed cost / (Price - Variable cost per unit)
= $ 30,000 / $ 75
= 400 units

Automatic machine break-even unit = Fixed cost / (Price -

Variable cost per unit)
= $ 40,000 / $ 200
= 200 units
Determination of Sales Mix
The sales mix can be measured in units sold or part of revenue. For
example, Whittier plans to sell 1,200 manual lawn mowers and 800
automatic lawn mowers, then the mix becomes 1,200: 800 or smaller to 3:

Alternatively, the sales mix can also be expressed as a percentage

of the total revenue that each product contributes. In this case,
manual lawn mower revenue is $ 480,000 ($ 400 x 1,200) and
automatic lawnmg income of $ 640,000 ($ 800 x 800). The manual
lawn mower earns 42.86 percent of total revenue while the lawn
mower automatically gets 57.14 percent of total revenue.
When viewed from the sales mix,
there are differences from both models.
The sales mix in the unit is 3: 2 from every five machines sold, 60
percent are manual lawn mowers and 40 percent are automatic lawn
The result in the sales mix in revenue are the manual lawn mower
earns 42.86 percent of total revenue while the lawn mower
automatically gets 57.14 percent of total revenue.

For CVP analysis, we must use the sales mix stated in the unit.
According to Whittier's marketing study, a 3: 2 sales mix can be
expected. This is the ratio used; while other ratios can be ignored. The
expected sales mix occurs and should be used in CVP analysis.
Sales Mix and CVP Analysis
The determination of a particular sales mix allows us to convert
multiproduct issues into single product CVP formats. Whittier can
define a single product it sells as a package containing three lawn
mowers and two automatic lawn mowers.
Product Variabl Cost Margin Margin Margin
e Price Contrib Sales Sales
per ution per
Unit per Package
Manual $400 $325 $75 3 $225
Automatic 800 600 200 2 400
Total         $625
Based on the contribute margin per packet above, the breakeven basis equation can be
used to determine the number of packets that need to be sold to achieve impass.
Break-even package = Fixed cost / contribution margin per package
= $ 96,250 / $ 625
= 154 packages

  Manual Automatic Total

Machine Machine
Sales $184,800 $246,400 $431,200
Less: Variable 150,150 184,800 334,950
Contribution Margin $34,650 $61,600 $96,250
Less: Direct fixed $30,000 40,000 70,000
Segment margins $4,650 $21,600 $26,250
Less: General fixed     26,250
Operating profit     $ 0
Sales Dollar Approach
How much sales
revenue should be
generated to achieve
break even?

Sales break even = Fixed cost / Contribution margin ratio

= $ 96,250 / 0,2232*
= $ 431,228
*contribution margin ratio = Contributed of margin
/ Sales
= $25,000 / $1,120,000).
Graph of Profit Volume
The volume profit graph illustrates the relationship
between profit and sales volume visually. The profit
volume graph is the graph of the operating profit
equation (Operating profit = (Price x Unit) - (Variable cost
per unit x Unit) - Fixed costs). In the graph, the operating
profit is a bound variable and the unit is an independent
variable. The value of the independent variable is usually
measured on the horizontal axis and the value of the
variable is bound to the vertical axis.
Tyson Company produces a single product with the following cost
and price data.
Total fixed cost $ 100
Variable cost per unit 5
Selling price per unit 10

By using such data, operating profit may be expressed as follows.

Operating profit = ($ 10 x Unit) - ($ 5 x Unit) - $ 100
= ($ 5 x Unit) - $ 100
From the data we can graph
this relationship by placing
the unit along the horizontal
axis and the profit (loss)
along the vertical axis. Two
points are needed to describe
a linear equation. The points
that are often chosen are
points that describe the
volume of zero sales and zero
Cost Graph of Profit Volume
The profit volume graph shows the relationship between
cost, volume, and profit. To get a more detailed picture,
we need to create a graph with two separate lines: the
total revenue line and the total cost line. Each of these
lines is presented with the following two equations.

Revenue = Price x Unit

Total Cost = (Variable cost per unit x Units) +
Fixed costs
If the total line of
income is below
the total cost line,
it will show the
loss area.
Thus, if the total
income line is
above the total
cost line, then the
profit area will
Assumptions on Cost Profit Volume Analysis
1. The analysis assumes the function of income and cost functions in

a linear fashion.
2. Analysis assumes price, total fixed cost, and variable cost per unit

can be accurately identified and remain constant throughout the

relevant range.
3. Analysis assumes what is produced can be sold.

4. For multiproduct analysis, it is assumed that the sales mix is

5. It is assumed that the selling price and cost are known for certain.
Because firms operate in a dynamic world, they must pay attention to
changes in prices, variable costs, and fixed costs..

For example, recently, Whittier Company conducted a market study of

manual lawnmowers revealing three different alternatives.
1. Alternative 1: if the advertising announcement increases $ 8,000,
sales will rise from 1,600 units to 1,725 units.
2. Alternative 2: a fall in the price from $ 400 to $ 375 per manual
lawn mower will increase sales from 1,600 units to 1,900 units.
3. Alternative 3: lowering the price to $ 375 and increasing
advertising expenditures by $ 8,000 will increase sales from 1,600
units to 2,600 units.
Should Whittier maintain its current pricing and advertising policies
or should he choose one of the three alternatives that the
marketing study describes?

Alternative 1
Alternative 1: if the
increases $ 8,000,
sales will rise from
1,600 units to 1,725
Should Whittier maintain its current pricing and advertising policies
or should he choose one of the three alternatives that the
marketing study describes?
Alternative 2: a fall
in the price from $
400 to $ 375 per
manual lawn
mower will increase
sales from 1,600
units to 1,900 units.
Should Whittier maintain its current pricing and advertising policies
or should he choose one of the three alternatives that the
marketing study describes?
Alternative 3:
lowering the price
to $ 375 and
expenditures by $
8,000 will increase
sales from 1,600
units to 2,600
Of the three alternatives identified
from the marketing study, the most
promising alternative to profit is the
third alternative.
Introducing Risks and Uncertainties
How do managers face risks and uncertainties? There are various
methods that can be used. First, the management must be aware
of the uncertainty of price, cost and quantity in the future.

Furthermore, managers move from consideration to break-even

point into consideration called "breakeven range". In other words,
due to the nature of uncertain data, a company may break even
when 1,800 to 2,000 units are sold. Thus, the breakeven point is
not estimated at a particular point, for example 1,900 units. In
addition, managers can use sensitivity analysis or what-if analysis.
In this case, the use of a spreadsheet of the
computer will help managers in determining the
break-even point (or profit targets and then check it
to see the impact of prices and costs varying on the
quantity sold). Two concepts that are beneficial to
management are the safety margins and
operating leverage These two concepts can be
considered to mitigate risk. Any concept requires
knowledge of fixed and variable costs.
Safety Margins
Margin of safety is a unit sold or expected to be sold
or revenue generated or expected to be generated
that exceeds the breakeven volume.
For example, if the company's breakeven volume is
200 units and the company sells 500 units, its safety
margin is 300 units (500 - 200). Safety margins can
also be expressed in sales revenue. If the breakeven
volume is $ 200,000 and the current income is $
350,000, then the safety margin is $ 150,000.
Operating Leverage

Operating leverage is the use of fixed costs to create a higher

percentage change in earnings when sales activity changes. The
greater the level of operating leverage, the more changes in sales
activity that will affect earnings. Because of this phenomenon, the
organization's cost mix has a significant effect on operating risks and
profit levels.

The degree of operating leverage (DOL) for a given level of sales can be
measured using the ratio of contribution margin to earnings.
Operating leverage rate = Contribution
margin / Profit
To illustrate the use of this
concept, consider a
company that is planning
to add a new product line.
To that end, the company
chooses to emphasize
automation or labor. If the
company chooses to
emphasize automation
rather than labor, then
costs remain higher and
variable costs per unit are
lower. The relevant data
for the sales rate of
10,000 units are as
Sensitivity Analysis and CVP

Sensitivity analysis is a "how-if" technique that tests the

impact of changes in underlying assumptions on an answer.
This analysis is relatively easy, that is, by entering data on
price, variable cost, fixed cost and sales mix and by using
the formula to calculate the breakeven point and expected
profit. Furthermore, the data can be changed as desired to
determine the impact of changes on expected returns.
Conventional CVP analysis assumes that all company costs can be grouped
into two categories: costs that change in line with sales volume (variable costs)
and unchanged costs (fixed costs). The ABC cost equation can then be
expressed as follows;
Total cost = Fixed costs + (variable cost per unit x number of units) + (setting cost
x number of arrangements) + (engineering costs x number of hours of

Operating profit as before is total revenue minus total cost. This is stated as

Operating Profit = total revenue - [fixed cost + (variable cost per unit x number of
units) + (total setup cost) + (engineering cost x number of engineering hours)]

Let's use the contribution margin approach to calculate the break-even point in
the unit. On a break-even, the operating profit is zero and the number of units to
be sold to break even is as follows.
Using CVP analysis, the number of units that must be sold to generate a profit
before tax of $ 20,000 is calculated as follows:
Number of units = (Profit target + Fixed costs) / (Price - Variable cost per unit)
= ($20,000 + $100,000)/($20-$10)
= $120,000/$10
= 12,000 unit
Using the ABC equation, the number of units to be sold to generate an operating profit
of $ 20,000 is calculated as follows.

Number of units = [profit target + fixed cost ABC + (setting cost x number of
arrangements) + (engineering cost of engineering hours)] / (Variable costs per unit)
Number of units = [$ 20,000 + 50,000 + ($ 1,000 x 20) + ($ 30 x 1,000)] / ($ 20- $ 10)
= 12,000 units
Strategic Implications: Conventional CVP Analysis vs ABC Analysis

For example, after a conventional CVP

analysis is performed, the Marketing
Department claims 12,000 sales are
impossible to achieve. Units that can be
sold for $10,000. Then, the company's
president director ordered the product
design engineers to find a way to reduce
product manufacturing costs. Also asked
to maintain the conventional cost
equation, a fixed cost of $ 100,000 and an
average variabel per unit of S10. Variable
cost per unit of $ 10 consists of: direct
labor $ 4, direct material $5 and overhead
variable $ 1. To meet the demand to
reduce the breakeven point the Technical
Department produces a new design that
requires less force. The new design
One year later, the president director found that the expected profit
increase did not occur. Conversely, the company is losing money...
Why? The answer is given by the ABC approach to CVP analysis
The initial ABC cost relationship in the example is as follows.
Total cost = 50,000 + ($ 10 x Unit) + ($ 1,000 x Settings) + ($ 30 x
Engineering hours)
For example, the new design requires more complicated arrangements that
raise the cost per setting from $ 1,000 to $ 1,600. Due to the increase in
technical content, the new design also requires additional engineering
support of 40 percent (from 1,000 hours to 1,400 hours). The following new
cost equations, including unit-level variable cost reductions
Total cost = $ 50,000 + ($ 8 x Unit) ($ 1,600 x Settings) + (30 x
Engineering hours)
The break-even point with no operating profit is done as follows
(suppose that 20 settings are still in place).
Total unit = [$50.000 + ($1,600 x 20) + ($30 x 1,400)/($20- $8)
= $124.000/$12
= 10,333 unit
Operating profit for 10,000 units is calculated as follows (keep in
mind that the maximum number that can be sold is 10,000
The information provided by the conventional equations to engineers gives this the impression that
any reduction in labor costs-which in affect the raw material or variable overhead-will reduce the total
cost because changes in the level of labor activity will not affect fixed costs. However, the ABC
equation shows the reduction of the kia that oppositely affects regulatory or technical activity may be
unfavorable. By providing a deeper, better design decisions can be made. Providing ABC's cost
information to these engineers may have them choose a different path, a path that benefits
companies more.
Analysis of CVP and JIT
If a company embraces JIT, then the variable cost per unit sold is reduced and the cost
increases. For example, now, direct labor is regarded as fixed and not variable. On the
other hand, direct materials are still regarded as variable costs by unit. Emphasis on total
quality and long-term purchases actually assumes that direct material costs are
completely proportional to the produced units becoming increasingly evident (since
waste, waste materials, and disk quantities are eliminated). Variable costs based on other
units such as electricity and sales commissions also apply. In addition, batch level
variables are lost (on a JIT system, the batch is one unit).

Thus, the cost equation in JIT can be expressed as follows.

Total cost = Fixed costs + (Variable cost per unit x number of units) + (Engineering cost
Number of engineering hours).
Since the JIT application is a special case of the ABC equation, no examples will be given.